Friday, November 22, 2013

In last month’s article, I
discussed the various ways individuals can hold title to real property in
Florida. These were as tenants in
common, joint tenants with full rights of survivorship and as tenants by the
entireties. These estates are the most
common but in many cases, they are not the best approach for owners of
investment property, rental properties, second homes (in or outside the state
of Florida) and foreigners. In these
cases a different approach to ownership should be considered. Because of the tax and estate issues involved
in this discussion, you should always seek professional legal and tax help
before choosing how to hold title to these type properties, as no one method is
best.

The
most common method for ownership is the use of a trust. The benefit of trust ownership is that it
allows for a transfer of the property outside the estate of the individual
owner. For example, If a husband and
wife have a home in New York and by a vacation home in Florida in Boca Raton,
when the first spouse dies, the property passes, by operation of law, to the
surviving spouse (simply record a death certificate and an affidavit of
continuous marriage to clear title).
However, when the second spouse dies, an ancillary administration of the
surviving spouse New York estate must be completed in order to clear
title. This is often a surprise to the
surviving children, and can delay sale of the property in Florida for months.

By
creating a trust to hold title to the property, this ancillary administration
is avoided. The most common trust is a
Revocable Living Trust. This type of
trust allows the settlors to retain the power to cancel the trust or take trust
action without permission of the beneficiaries (or the trustee(s) if different
than the settlors themselves. In the
scenario above, the husband and wife create a trust naming themselves as the
Co-Trustees, and their preferred heirs as the beneficiaries.

They
also provide a provision that upon the first spouse’s death, the second spouse
remains the sole trustee and then upon the last spouse’s death, a successor trustee
is appointed (either a friend, relative, attorney or one of the beneficiaries)
who then has the powers provided for in the trust. These powers can be as broad as the original
trustees or can be specifically limited, such as requiring the property be
deeded to a specific person or charity.
However, no probate of the last spouse’s estate is needed. To clear title only the recording of a death
certificate and a trust certificate with relevant portions of the trust
attached is necessary.

Generally
speaking, Revocable Trusts do not infer any tax benefit and provide no creditor
rights protection to the settlors. The
property in the trust is deemed the settlors property for tax and creditor
claims. This is because the settlors
retain control over the property through the revocable nature of the
trust. Therefore a Revocable Trust is
not a good vehicle to protect owners of multiple properties where the risk of
tenant lawsuits could result in substantial damage claims.

Revocable
Trusts do provide the ability to protect the trust from the claims of the
creditors of the beneficiaries of the trust.
By including a spendthrift clause in the trust, the funds and assets
held by the trust that would go to a beneficiary cannot be reached as long as
the funds either remain in the trust and the distribution of assets is
discretionary to the trustee (and not mandatory). With proper drafting, the
funds can be used to benefit the credit risky beneficiary without letting
creditor’s reach those funds.

Trust
usage does have its drawbacks. It is an
immediate expense to create a trust that may never be used to avoid
probate. It breaks the special
creditor’s right protection afforded property owned by husband and wives in
Florida. It does not offer any creditor
or tax protection. Many people create a
trust and fail to put all their assets in the trust, which then requires some
level of probate. However, in many cases
a trust makes sense, especially if done as part of a comprehensive estate plan.

Michael J Posner, Esq., is a partner in Ward, Damon, Posner, Pheterson
& Bleau, P.L., a mid-sized real estate and business oriented law firm
serving all of South Florida, with offices in Palm Beach County. They specialize in real estate trust matters and
can assist in advising on and creating trusts.
Mr. Posner can be reached at 561.594.1452, or at mjposner@warddamon.com

Owning Real Property in Florida may appear simple but in fact it
can be a mind field for those in particular situations, such as married
couples, older single out of state owners, Canadians (and other foreigners),
owners of multiple investment properties, and unmarried couples. Without proper planning, a wrong decision can
lead to unnecessary probates, judgments, tax withholding and other undesired
consequences. The following is a basic
primer on estate holding, but it should only be a starting point, and all
readers are encouraged to discuss the best method for property ownership with their
legal and tax professional.

The Three
Estates: In Florida, the law recognizes
three distinct estates for multiple owners of property. Two are derived from common law, and the
third, tenants by the entireties (TBTE) is distinct to Florida and about half
of the states in the US. The traditional
estates are Tenants in Common and Joint Tenants.

Ownership as
Tenants in Common (TIC) means that each owner owns a distinct percentage as
stated in the deed. If not stated, then
it is presumed to be equal shares, two owners means each owns fifty percent,
four owners means each owns twenty-five percent. TIC owners can freely convey their interest
without affecting the nature of the estate, and upon the owner’s death, their
TIC interest passes to their heirs at law.
Creditors can encumber a TIC interest, either voluntarily through a
mortgage, or involuntarily through a judgment.
To create a TIC interest in Florida the deed need merely recite the
grantee (buyer’s) names, and no statement of interest is required. For example, John Smith and Dave Brown,
grantees, creates a TIC estate.

Ownership as
Joint Tenants traditionally meant that the owners share equally in the
ownership of the entire property. To
create a joint tenancy, four specific elements are necessary. The joint tenants must own an undivided
interest in the property as a whole and their share must be equal (TIC owners
can have variable ownership). (2) The estates of the joint tenants are vested must
be for the same period of time. (3) The joint tenants hold their property under
the same title. (4) The joint tenants all enjoy the same rights of possession. Traditionally, merely stating John Smith and
Dave Brown, joint tenants, as grantees, created the Joint Tenant estate. However, Florida courts have long rejected
that rule, requiring magic additional language to create the estate.

The magic
language is “with rights of survivorship” added to the joint tenant
language. John Smith and Dave Brown,
joint tenants with rights of survivorship would create the necessary
estate. The main benefit of the joint
tenancy is that upon the death of one tenant, the property passes outside of
the deceased owner’s estate to the other owner and no probate is required. Joint Tenancy does not act as a creditors protection
scheme and creditors can lien and foreclose a joint owner’s interest. Joint Tenancy is usually the best option for
owners with a common interest through family or for same sex couples. After death, the recording of death
certificate and a non-tax (estate) certificate will generally clear title in
the surviving joint tenant.

The final estate
in Florida is Tenancy by the Entireties (TBTE).
This estate must be created with the same conditions as a joint tenancy,
but is only available to married couples.
The magic language can be John Smith and Mary Smith, husband and wife,
or John Smith and Mary Smith, his wife, Mary Smith and John Smith, her husband,
or even John Smith and Mary Smith, as tenants by the entireties. The TBTE estate has the same survivorship
interest as the joint tenant estate but also adds a creditor’s protection that
only applies to married couples holding title as TBTE. For example, a couple owns three rental homes
in Florida in addition to their homestead.
If one spouse is sued and a judgment is entered against that spouse, the
judgment will not attach or become a lien against the property. Thereafter, as long as they remain married or
the non-judgment spouse survives the judgment spouse, the lien will not attach
against the property. However, if the
parties get divorced, or the judgment spouse survives the non-judgment spouse,
the lien can attach.

We frequently see
mistakes in planning with TICs created when the new owners, had they known
would have either selected a joint tenancy or even a TBTE estate. Knowing your options and planning when
purchasing can avoid these problems.

Michael
Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business
oriented law firm serving all of South Florida, with offices in Palm Beach
County. They specialize in real estate
and can assist sellers and buyers in all real estate matters. They can be reached at 561.594.1452, or at
mjposner@warddamon.com

About Me

I am a Florida Board Certified Real Estate Attorney with 30+ years of residential and commercial real-estate experience.
I am an equity partner in Ward, Damon, Posner, Pheterson & Bleau, a mid-sized law firm serving all of South Florida, with three offices in Palm Beach County. Our firm specialize in and can assist in buying, borrowing and selling property throughout South Florida. I can be reached at 561.594-1452, mjposner@warddamon.com or www.warddamon.com